FDI Tax Breaks, Incentives Slammed in New Report

Washington, DC – The use of tax breaks and other incentives by state and local governments and economic development agencies across the country to attract foreign businesses has come under fire in a study just released by The Brookings Institution.

Calling the practice “deeply flawed,” the economic think tank states that “mergers and acquisitions are driving foreign investment in the US, not the opening of new establishments.”

Civic leaders, it said, “would accomplish far more by bolstering industrial amenities to retain overseas companies than by offering rich subsidies designed to attract new ones.”

According to Devashree Saha, a senior policy analyst at Brookings and lead author of the report, “Policies that narrowly focus on new business openings are probably not going to give you a big bang for your buck.”

In 2011, only 26 percent of all jobs at US locations of foreign companies were created by the opening of a new factory, office or store, while nearly a third were generated by foreign takeovers of US companies, he said, adding that over the past 20 years, 84 percent of foreign companies that came to the US did so through an acquisition.

“Federal, state and local governments “should invest more to build strong industry clusters by ensuring an adequate supply of skilled workers, modernizing US infrastructure and increasing investment in research and development, among other initiatives,” the study found.

While the US is still the global leader in attracting FDI, the US share of global foreign direct investment (FDI) shrank from 37 percent in 2002 to 17 percent in 2012 with China and other developing economies grabbing a growing share of foreign business, according to data from the Washington, DC-headquartered Organization for International Investment (OFII).

“Outsize Benefits” Generated

Foreign-owned companies employ about 5.6 million workers in the US, or about 5 percent of private payrolls, according to the Brookings study. Their employment grew steadily from 1991 to 2000, but has stagnated since.

“Yet, the firms generate outsize benefits, accounting for a fifth of US goods exports and 15.4% of all private R&D in 2011,” the study said. “Foreign owners of US operations also pay higher wages than US companies — $77,000 vs. $60,000, on average.”

The report also ranks states and “metro areas” based on their share of jobs at foreign-owned establishments.

In 2011, Delaware led with 8.5 percent of all private-sector jobs at foreign-owned locations, particularly in the pharmaceutical, medicine, manufacturing and insurance sectors, followed by South Carolina with 7.5 percent of its private jobs at foreign-owned companies, largely in the auto industry.

Bridgeport, Connecticut, led among US “metro areas” with foreign firms accounting for 13.6 percent of private payrolls, particularly in the computer systems design and brokerage fields.

Greensboro, North Carolina, ranked second with 9 percent – primarily retail grocery stores, auto manufacturing, and pharmaceuticals). Worcester, Massachusetts tied for second place with most of its foreign-owned employers in the power generation, electrical products and insurance sectors.

In the 20 metro areas analyzed for the Brookings study, FDI made up more than half of all jobs in the largest industries active in Dayton, Ohio; Chattanooga, Tennessee, and Charleston, South Carolina, and San Jose, California.